Brokerage houses remained bullish on Aurobindo after this acquisition and raised target price up to Rs 915, implying 20.5 percent potential upside from Thursday's closing levels.
Aurobindo Pharma share price rallied 8.8 percent intraday to hit a fresh 52-week high of Rs 826.35 on Friday as brokerage houses, which are bullish on the stock, raised target price after acquisition of US Dermatology and Oral solid businesses from Sandoz.
Company wholly owned subsidiary, Aurobindo Pharma USA Inc has entered into an agreement to acquire commercial operations and three manufacturing facilities in USA from Sandoz Inc, USA, a Novartis division, for total consideration of $900 million.
The acquisition includes in-line portfolio of dermatology and oral solids; authorised generics and in-licensing products; branded dermatology products; 3 manufacturing facilities; and 100 percent shareholding in Eon Labs Inc, a wholly owned subsidiary of Sandoz.
"This business has been carved out by the management of Sandoz for sale and is consisting of dermatology and oral solids businesses. The net sales of the acquired business were around USD 1.2 billion for the calendar year ended December 2017," the company said in its filing.
This deal is expected to be accretive to normalized EPS from first full year of ownership and is expected to complete in 2019, Aurobindo believes.
Revenues from this portfolio stood at $600 million in the first half of CY18. Segment wise, dermatology comprises of around 30 percent while oral solids comprises of around 70 percent of the portfolio.
"After expiration of certain in-licensed product contracts, and rationalisations of acquired products that will not negatively impact profitability (but before the impact of any potential FTC-led divestments) the portfolio is expected to generate over $900 billion in sales for the first 12 months after completion of the transaction," Aurobindo said.
Brokerage houses remained bullish on the stock after this acquisition and raised target price up to Rs 915, implying 20.5 percent potential upside from Thursday's closing levels.
Brokerage: Credit Suisse | Rating: Outperform | Target: Rs 840 | Return: 11%
Aurobindo acquired high-concentration portfolio from Sandoz. Acquisition is attractive on financial parameters and at this size, we expect overall mid-single digit growth.
We have maintained Outperform rating on the stock with increased target price to Rs 840 from Rs 700 per share.
Brokerage: ICICI Securities | Rating: Buy | Target: Rs 915 | Return: 20%
The acquisition is at 1x (after adjustment) of sales which is one of the cheapest among recent deals. The reason for the same is the negative growth trajectory the portfolio is witnessing over the last few quarters owing to generic pricing pressure in the US. This deal is also a part of parent Novartis’s broader game plan of exiting from non-core generics globally.
For Aurobindo, however this augurs well as this offers a footprint in the Derma segment in the US and in a way it fills the portfolio gap especially for derma (generics + branded). There will be significant debt addition nonetheless, but looking at the broader picture of synergy and earlier history of successful acquisitions, we believe the company is well poised to manage this added burden.
Aurobindo possesses one of the best enduring ecosystems among peers (vertically integrated model, lower product concentration) to withstand the volatility in the US generics space. We have rolled over estimates to FY21 to capture the synergy of this deal. We have also upgraded currency expectations. Accordingly, new target price arrives at Rs 915 based on 15x FY21E EPS of Rs 61.2.
Brokerage: Elara Capital | Rating: Buy | Target: Rs 836 | Return: 10%
Sandoz acquisition seems to be transacted at attractive valuations (1x sales and 5x EBITDA), which will give Aurobindo higher scale ($2.3 billion of consolidated US sales) and diversification in US (derma portfolio). Although the generics cycle in the US is going through a tough environment, we see Sandoz acquisition as value-accretive.
We will incorporate Sandoz deal post closure of transaction and clarity from FTC on divestments. The incorporation of Sandoz business will increase our FY20E EPS by 15-20 percent, if we assume transaction closes by FY19-end.
Strong US business and an emerging EU (transitioning from negative OPM into the double digits) show drivers are in place. The EIR receipt for Unit IV in April 2018 and gErtapenem launch will aid in injectables sales in the US in FY19. We retain Buy with a target price of Rs 836 on 18x FY20E P/E.
Brokerage: Motilal Oswal | Rating: Buy | Target: Rs 910 | Return: 20%
The company guided for sales of $900 million and a company-level EBITDA margin for the first 12 months post completion of the transaction (likely in Q1FY20). Accordingly, the deal turns out to be at an attractive valuation of around 1x EV/sales and around 4.3x EV/EBITDA.
The acquisition would add around 300 products and enhance manufacturing capabilities in the US.
We expect incremental PAT of around $92 million on a 12-month basis from this deal. We raise FY20 EPS estimate by 20 percent to Rs 59 to factor in this acquisition. We value Aurobindo at a 12-month forward P/E of 15x (unchanged) and revise target price to Rs 910 (prior: Rs 750). Re-iterate Buy.Disclaimer: The views and investment tips expressed by brokerage houses on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.